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Join our panel of leading economic and transportation analysts as they share their exclusive insight on where rates are headed and the issues that will be driving those rate increases over the next 12 months.

Earlier this week, the United States Supreme Court upheld a ruling in which it ordered $345 million in reparations and reductions from Class I railroad Burlington Northern Santa Fe (BNSF) to two shippers, Western Fuels Association Inc. and Basin Electric Cooperative Inc.

According to a Bloomberg report, Supreme Court justices rejected an appeal from BNSF, which stemmed from proceedings before the Surface Transportation Board, who ordered that BNSF make refunds to both shippers. Other reports said BNSF has paid $120 million to date.

The case had to do with a pricing challenge from the utility shippers. In 2007, the STB initially issued a decision in favor of BNSF but reversed course in early 2009.

Western Fuels Association Inc. and Basin Electric Cooperative Inc. had initially challenged the railroad transportation rates charged by BNSF to haul 8 million tons of coal each year from mines in Wyoming’s Powder River Basin to their electric-generating plant in Moba Junction, Wyo., said STB officials. The STB noted that this utility plant is captive to BNSF and provides electricity into grids serving customers in nine Western states.

The STB said in 2009 it found “the transportation rates BNSF charged the Utilities…to be unlawfully high.” The decision also stated that BNSF was ordered to lower its transportation rates by approximately 60 percent. The STB stated that this represents the single largest award to a captive shipper, with BNSF obligated to reimburse the shippers for approximately $100 million in overcharges from 2004–2008.

BNSF said at the time it “strongly opposes the STB decision on its merits and believes the process used to arrive at this result is unfair.” The company added that the case is a manipulation of the new rule and represents an outcome-oriented decision in favor of these shippers and maintains that the rates charged to the shippers are reasonable from both a market and regulatory perspective.

A noted railroad analyst told LM this decision may ultimately do more harm than good for railroad carriers and shippers.

“It is a bad decision that comes at a time when rail transportation is being encouraged, as well as [a push] to take trucks off the highways,” a railroad expert told LM. “The potential implications of this are horrendous, because the minute you start regulating what somebody can charge for a line of service, you limit your ability to provide that service.”

Morgan Stanley analyst William Greene wrote in a research note that the while the STB’s decision is not a game changer for rail rate regulation, it demonstrates that there are political pressures to curb rail pricing, and the STB is sensitive to these concerns.

“The more the STB demonstrates a balanced approach to rate regulation, the more likely calls to re-regulate railroads lose urgency in Congress,” wrote Greene. “That said, as captive rates move higher, shipper wins in rate cases could become more common leading more rails to settle at regulatory limits rather than face the cost of litigating a rate case.”

About the Author

Jeff BermanGroup News Editor

Jeff Berman is Group News Editor for Logistics Management, Modern Materials Handling, and Supply Chain Management Review. Jeff works and lives in Cape Elizabeth, Maine, where he covers all aspects of the supply chain, logistics, freight transportation, and materials handling sectors on a daily basis. .(JavaScript must be enabled to view this email address).

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